IRS Will No Longer Require Certain Nonprofits to Disclose Large Donors
Posted July 17, 2018 11:40 p.m. EDT
Updated July 17, 2018 11:42 p.m. EDT
The Trump administration will end a long-standing requirement that certain nonprofit organizations disclose the names of large donors to the IRS, a move that will allow some political groups to shield their sources of funding from government scrutiny.
The change, which has long been sought by conservatives and Republicans in Congress, will affect thousands of labor unions, social clubs and political groups as varied as arms of the AARP, the U.S. Chamber of Commerce, the National Rifle Association and Americans for Prosperity, which is funded partly by the billionaire brothers Charles and David Koch.
Such groups have played an increasingly prominent role in American politics in the wake of the Supreme Court’s 2010 ruling in a case brought by the nonprofit group Citizens United, which empowered them to spend unlimited money on campaign ads.
Treasury officials said the reporting change — which affects contributions known as dark money because their source is hidden — would protect privacy and reduce compliance costs for nonprofits. The IRS could still request donor information from groups in the rare event that it was needed for tax scrutiny.
“Americans shouldn’t be required to send the IRS information that it doesn’t need to effectively enforce our tax laws, and the IRS simply does not need tax returns with donor names and addresses to do its job in this area,” Treasury Secretary Steven Mnuchin said in a statement Monday evening.
But critics denounced the measure, saying it would encourage political donations from both domestic and foreign contributors who want to skirt the law or keep their influence secret.
“It’s a clear signal that the IRS and now the Treasury Department are not interested in any significant oversight of nonprofits,” said Marcus S. Owens, a Washington lawyer and former director of the IRS division for tax-exempt organizations. “What they’re doing is excusing them from filing information that is of material importance for determining whether organizations are operating appropriately and within the boundaries of the rules.”
Lloyd Hitoshi Mayer, a law professor at Notre Dame Law School, said it would further diminish reporting requirements for the groups. “This will make so-called dark money a bit darker,” he said.
Previously, nonprofits such as unions and organization registered under section 501(c)(4) of the tax code were required to report to the government the names of donors who contributed more than $5,000 in the span of a year. That information was redacted on the publicly viewable forms the groups file annually, though amounts of donations remain visible.
Nonprofits that exist primarily to influence political campaigns, including so-called 527 organizations, will still be required to report the names of large donors, as will charities that accept tax-deductible contributions.
Conservative groups and donors had been lobbying the Trump administration to make the change, partly by arguing that the reporting requirement made their funders vulnerable to exposure by the IRS and state regulators.
“Transparency is meant for the government, not for private individuals,” said Philip Ellender, the head lobbyist for Koch Industries, the international conglomerate owned by the Koch brothers. Koch Industries began lobbying the White House on the issue after President Donald Trump’s election, according to lobbying filings.
Additionally, Americans for Prosperity and other 501(c)(4) organizations in the Koch brothers’ network of advocacy groups were among dozens of such nonprofit groups to sign onto a letter sent in May to Trump and Mnuchin declaring a policy change “an issue of utmost importance.” The letter accused the IRS of “targeting of nonprofit organizations on the basis of ideology.”
Officials with the Treasury Department largely echoed that reasoning, explaining that the move was driven in part by the IRS’ inappropriate targeting of political groups during the administrations of Presidents George W. Bush and Barack Obama. The IRS inspector general found that both conservative and progressive groups were targeted and that IRS officials inappropriately sought information on donors to Tea Party groups as well as to liberal groups.
In guidance issued by the IRS late on Monday, administration officials said that the agency did not need personally identifiable donor information “in order for it to carry out its responsibilities.”
“The requirement to report such information increases compliance costs for some private parties, consumes IRS resources in connection with the redaction of such information, and poses a risk of inadvertent disclosure of information that is not open to public inspection,” the guidance said. There are many examples of inadvertent disclosure of donor information from federal forms in recent years. In 2013, the IRS posted a list of donors to an arm of the Republican Governors Association. In 2016, a federal judge cited a pattern of such disclosures when ruling against the state of California’s request for donor information from Americans for Prosperity.
The ruling noted that the state had posted more than 1,700 confidential donor lists on the internet, including the names and addresses of hundreds of donors to Planned Parenthood.
The IRS will now be able to see those groups’ lists of big donors only if it specifically requests them. Those lists are not open to the public under existing rules.
Steven M. Rosenthal of the nonpartisan Tax Policy Center said the change effectively ends the agency’s oversight. “The IRS audits tax-exempt organizations once in a blue moon and only after many years,” said Rosenthal, noting that the agency has been starved for resources and has had to cut back enforcement. “It’s an impossible challenge to follow the money trail at that point.” Republicans hailed the move, with Sen. Mitch McConnell, R-Ky., the Senate majority leader, on Tuesday calling the decision “particularly welcome news to those of us who intently are focused on defending the First Amendment, for those of us who over the years have raised concerns during the last administration about activist regulators punishing free speech and free association. It’s a straightforward, common sense policy decision.”
Democrats shot back, with Sen. Ron Wyden, D-Ore., the ranking member on the Finance Committee, saying the decision would allow “anonymous foreign donors to funnel dark money into nonprofits.”